Stock Analysis

Can Mixed Fundamentals Have A Negative Impact on Embellence Group AB (publ) (STO:EMBELL) Current Share Price Momentum?

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OM:EMBELL

Most readers would already be aware that Embellence Group's (STO:EMBELL) stock increased significantly by 12% over the past week. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. Particularly, we will be paying attention to Embellence Group's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Embellence Group

How To Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Embellence Group is:

7.9% = kr34m ÷ kr426m (Based on the trailing twelve months to September 2023).

The 'return' is the yearly profit. One way to conceptualize this is that for each SEK1 of shareholders' capital it has, the company made SEK0.08 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of Embellence Group's Earnings Growth And 7.9% ROE

On the face of it, Embellence Group's ROE is not much to talk about. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 11% either. Therefore, Embellence Group's flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.

Furthermore, even when compared to the industry, which has been shrinking its earnings at a rate of 0.9% over the last few years, we found that Embellence Group's performance is pretty disappointing, as it suggests that the company has been shrunk its earnings at a rate faster than the industry.

OM:EMBELL Past Earnings Growth October 27th 2023

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Embellence Group is trading on a high P/E or a low P/E, relative to its industry.

Is Embellence Group Making Efficient Use Of Its Profits?

Despite having a moderate three-year median payout ratio of 31% (meaning the company retains69% of profits) in the last three-year period, Embellence Group's earnings growth was more or les flat. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

In addition, Embellence Group only recently started paying a dividend so the management must have decided the shareholders prefer dividends over earnings growth. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 35%. However, Embellence Group's ROE is predicted to rise to 13% despite there being no anticipated change in its payout ratio.

Summary

In total, we're a bit ambivalent about Embellence Group's performance. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

Valuation is complex, but we're here to simplify it.

Discover if Embellence Group might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.